Is an already tough year for the NHS about to get a lot tougher?

With talk of tax cuts proving popular in the race to become the next Conservative party leader, and pay rise expectations significantly higher than budgets allow, the NHS could be caught in the crossfire of conflicting demands. Sally Gainsbury describes how the health service is already having to deal with Covid, alongside rising levels of demand for care, with substantially less money than before.

Blog post

Published: 18/07/2022

With tax cuts high on the political agenda for Conservative party leadership candidates, and inflation fuelling pay rise expectations significantly higher than budgets allow, many will be concerned the NHS will be caught in the crossfire of conflicting demands.

This week, public sector pay review bodies are expected to publish their formal recommendations for pay settlements this year in the region of 5% – a figure that staffing unions, including those in the NHS, will argue is still substantially below average wage increases in the rest of the economy.

NHS England has said its funding this year assumed average pay awards of around 3%, with awards higher than that costing around £900 million for every additional 1%. It argues that, unless funded by budgetary increases from the Treasury, pay rises in excess of this will add to a very difficult period. Judged against general inflation, the NHS budget for this year will run at a real-terms cut of around 3% less than last year – or just under £5 billion. 

The Treasury line on this real-terms reduction is that while the NHS budget has been cut compared to the financial year that ended in March, so too has the additional cost of the pandemic. Yet this is not borne out by some of the more costly implications of the pandemic, such as the need to backfill sick or isolating staff with temporary replacements, who also need to be paid – often at a premium rate. The data on NHS staff sickness shows that absences were over a fifth higher in February 2022 than they were in the same month in 2021, with almost a third of those absences attributed to Covid.

Another significant pressure now faced by NHS staff and organisations is that, during the peak periods of the pandemic in 2020 and 2021, a portion of non-urgent NHS procedures and appointments were paused to deal with the burdens created by Covid. Steadily recovering A&E attendances and targets to increase elective activity to at least 104% of pre-pandemic levels this year mean that option is no longer available, leaving the NHS to continue dealing with Covid, while also managing rising levels of demand for care, and to do so with substantially less money.

Normalcy and unrealistic expectations

There will be some who will still argue that such tough choices have to be made. The NHS budget was increased temporarily during the pandemic and reducing it back to “normalcy” is now an uncomfortable necessity.

However, normalcy wasn’t working either.

As we have previously argued, NHS funding levels prior to the pandemic were already unrealistically low, with NHS England, the Department of Health and Social Care and the Treasury seemingly caught in a mutual confidence trick where successive funding rounds were premised on unachievable assumptions about efficiency savings and demand management. With failure not something that could be admitted, each new, hard-fought-for slug of cash was wiped out by a pre-existing funding deficit that no one wanted to admit was there.

This can most clearly be observed by comparing the planned and actual spending for NHS provider trusts, which together account for almost three-quarters of NHS spending. Since 2015, trust spending plans have almost consistently been overspent by the region of £2 billion each year. Chancellors have come in and made new funding announcements, but always on the condition of further unrealistic efficiency targets and activity containment plans that were inevitably missed – cutting and pasting the problem into the following financial year.

Before the pandemic, in so far as NHS trusts were able to find cost efficiencies to absorb annual increases in inflation, they were more or less able to hold this £2 billion excess spending against plan constant. (However, a separate but related development saw NHS trust underlying income and expenditure deficits balloon far above the £2 billion figure, reflecting how the main policy tool to urge trusts to make unrealistic efficiencies was to systematically pay them less than the cost of the care they delivered, requiring deficits to be offset by unplanned savings, or cuts, to other budgets such as primary care or investment in new services.)

Reality and the busted plan

However, when the pandemic hit, the NHS’s ability to continue absorbing inflation was shot. Setting aside spending NHS England directly attributed to Covid, we estimated that in 2020/21, NHS trust spending exceeded the original Long Term Plan (LTP) set out a year before by at least £4 billion. Over the course of 2021/22, this figure looks to have increased to around £6.5 billion, again excluding Covid costs and temporary extra spending on additional elective care capacity, which is needed to make inroads into the NHS waiting list backlog. Spending to the end of May threatens to push this year’s figure close to £8 billion, of which around £1.2 billion is driven by higher-than-expected non-wage inflation, particularly energy costs and estates and facilities costs contractually linked to the Retail Price Index.

This higher spending above the LTP on what can be considered business-as-usual care activities in NHS trusts (rather than additional and nominally temporary costs associated with the pandemic or working through the elective waiting list backlog) matters, because by 2024/25 the new NHS budget set by the October 2021 Spending Review will be just £3.5 billion higher than the budget implied by the LTP.

And every penny and more of that £3.5 billion has already been earmarked for items not envisaged in the original LTP: over £750 million on the cost to the NHS of the new Health and Social Care Levy, £500 million for ongoing Covid costs (including booster campaigns), and finally £3.1 billion to fund what is hoped to be the last slew of extra capacity needed to remove the waiting list backlog which is currently over 50% bigger than when the LTP was drawn up.

In other words: without the extra cash already ringfenced for extra costs, the NHS’s budget in 2024/25 will be lower than the pre-pandemic trajectory set by the LTP.

Treasury clawback

This year’s 3% real-terms budget cut (measured against whole-economy inflation figures for the budget in March) is then the first and widest step in a three-year plan to claw back the bulk of the extra funding given to the NHS to deal with the pandemic, with the following two years scheduled to see budgets grow at less than half the NHS’s historic real-terms average.

The upshot is that one of the first tasks for the 42 new integrated care boards now charged with managing the bulk of the NHS’s budget is to deliver over £5.5 billion worth of spending cuts this year alone – “targeting savings” in NHS England’s lexicon. A large swathe of those will relate to budgets the Treasury ringfenced for spending on Covid, which have been slashed by almost 60% since the second half of 2021/22. But even if Covid burdens do substantially diminish over the course of this year, it is unlikely that will translate directly into overall cost savings as NHS finance directors – ever skilled in the art of navigating Treasury-imposed obstacles – talk privately of how ringfenced Covid budgets have in practice been used to subsidise unfunded cost pressures in their business-as-usual activities.

As if this financial picture was not bleak enough, it is one that does not yet include the impact of higher-than-expected pay settlements. And although NHS England and the Department of Health and Social Care and Treasury will attempt to make the special case for additional funding for NHS pay settlements, the Treasury will be wary of setting precedents across the rest of the public sector. While talk of tax and national insurance cuts may be popular – particularly amid the current cost of living crisis – the implications for NHS services, staff and patients may be less so.